External Environment

The External Environment

General Environment
Dimensions in the broader society that influence and industry and the firms within it
 Economic  Sociocultural  Global  Technological  Political/legal  Demographic

Industry Environment
Set of factors directly influencing a firm and its competitive actions and competitive responses
 Threat of new entrants  Power of suppliers  Power of buyers  Threat of product substitutes  Intensity of rivalry among competitors

Competitor Environment
All of the companies that the firm competes against.

Analysis of the External Environments

General environment
 Focused on the future

Industry environment
 Focused on factors and conditions influencing a firms profitability within an industry

Competitor environment
 Focused on predicting the dynamics of competitors actions, responses and intentions

Opportunities and Threats

Opportunity
 A condition in the general environment that if exploited, helps a company achieve strategic competitiveness

Threat
 A condition in the general environment that may hinder a companys efforts to achieve strategic competitiveness

External Environmental Analysis

A continuous process which includes Scanning for early signals of potential
changes and trends in the general environment

Monitoring changes to see if a trend emerges

from among those spotted by scanning

Forecasting projections of outcomes based on

monitored changes and trends

Assessing the timing and significance of

changes and trends on the strategic management of the firm

Components of the External Environmental Analysis

General Environment (cont d)

The Economic Segment  Inflation rates  Interest rates  Trade deficits or surpluses  Budget deficits or surpluses  Personal savings rate  Business savings rates  Gross domestic product

General Environment (cont d)

The Sociocultural Segment  Women in the workplace  Workforce diversity  Attitudes about quality of worklife  Concerns about environment  Shifts in work and career preferences  Shifts in product and service preferences

General Environment (cont d)

The Global Segment  Product innovations  Applications of knowledge  Focus of private and government-supported R&D expenditures  New communication technologies

General Environment (cont d)

The Technological Segment  Product innovations  Applications of knowledge  Focus of private and government-supported R&D expenditures  New communication technologies

General Environment (cont d)

The Political/Legal Segment  Antitrust laws  Taxation laws  Deregulation philosophies  Labor training laws  Educational philosophies and policies

General Environment
The Demographic Segment  Population size  Age structure  Geographic distribution  Ethnic mix  Income distribution

Industry Environment
Industry Defined
 A group of firms producing products that are close substitutes
 Firms

that influence one another

 Includes

a rich mix of competitive strategies that companies use in pursuing strategic competitiveness and above-average returns

The Five Forces of Competition Model

Threat of New Entrants: Barriers to Entry

Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost disadvantages independent of scale Government policy Expected retaliation

Barriers to Entry
Economies of Scale
 Marginal improvements in efficiency that a firm experiences as it incrementally increases its size

Advantages and disadvantages of largescale and small-scale entry

Barriers to Entry (cont d)

Product differentiation
 Unique products  Customer loyalty  Products at competitive prices

Capital Requirements
 Physical facilities  Inventories  Marketing activities  Availability of capital

Barriers to Entry (cont d)

Switching Costs
 One-time costs customers incur when they buy from a different supplier  New equipment  Retraining employees  Psychic costs of ending a relationship

Barriers to Entry (cont d)

Access to Distribution Channels
 Stocking or shelf space  Price breaks  Cooperative advertising allowances

Cost Disadvantages Independent of Scale

 Proprietary product technology  Favorable access to raw materials  Desirable locations

Barriers to Entry (cont d)

Cost disadvantages independent of scale
 Proprietary product technology  Favorable access to raw materials  Desirable locations

Government policy
 Licensing and permit requirements  Deregulation of industries

Barriers to Entry (cont d)

Expected retaliation
 Responses by existing competitors may depend on a firms present stake in the industry (available business options)

Bargaining Power of Suppliers

Supplier power increases when:  Suppliers are large and few in number  Suitable substitute products are not available  Individual buyers are not large customers of suppliers and there are many of them  Suppliers goods are critical to buyers marketplace success  Suppliers products create high switching costs.  Suppliers pose a threat to integrate forward into buyers industry

Bargaining Power of Buyers

Buyer power increase when:  Buyers are large and few in number  Buyers purchase a large portion of an industrys total output  Buyers purchases are a significant portion of a suppliers annual revenues  Buyers can switch to another product without incurring high switching costs  Buyers pose threat to integrate backward into the sellers industry

Threat of Substitute Products

The threat of substitute products increases when:  Buyers face few switching costs  The substitute products price is lower  Substitute products quality and performance are equal to or greater than the existing product Differentiated industry products that are valued by customers reduce this threat

Intensity of Rivalry Among Competitors

Industry rivalry increases when:  There are numerous or equally balanced competitors  Industry growth slows or declines  There are high fixed costs or high storage costs  There is a lack of differentiation opportunities or low switching costs  When the strategic stakes are high  When high exit barriers prevent competitors from leaving the industry

Interpreting Industry Analyses

Low entry barriers Suppliers and buyers have strong positions Strong threats from substitute products Intense rivalry among competitors

Unattractive Industry

Low profit potential

Interpreting Industry Analyses

High entry barriers Suppliers and buyers have weak positions Few threats from substitute products Moderate rivalry among competitors

Attractive Industry

High profit potential

Strategic Groups Defined

A set of firms emphasizing similar strategic dimensions and using similar strategies
 Internal competition between strategic group firms is greater than between firms outside that strategic group  There is more heterogeneity in the performance of firms within strategic groups

Strategic Groups
Strategic Dimensions
 Extent of technological leadership  Product quality  Pricing Policies  Distribution channels  Customer service

Competitor Analysis
Competitor Intelligence
 The ethical gathering of needed information and data that provides insight into:
A A

competitors direction (future objectives)

competitors capabilities and intentions (current strategy)

A

competitors beliefs about the industry (its assumptions) competitors capabilities

A

Competitor Analysis Components